THE WORST IS YET TO COME

Hi folks... First of all I feel bad for all the victims of this useless and terrible war in Ukraine. What’s going on in this world is something we weren’t waiting for. February 24, 2022 Vladimir Putin announced a special military operation in Donbass and Crimea. On the other side, the West and NATO members reached to deal unprecedented and extraordinary measures against the Russian Federation. Putin destroyed his economy in 7 days, cutting all the relations with EU, USA and Japan. This is already an economic hybrid world war 3 which could converge in catastrophic consequences for the planet. Personally, I’m quite negative on the current situation as the conflict move on. Quite pessimist, because I see an economic downturn on the horizon, as already pointed out in my previous article, and yes I see a recession or even worse in the short term. Bond market already at the end of 2021 had signaled risks of recession but actually I was more concerned for a stagflation period when you have an high inflation, with high energy prices, and slow or zero economic growth. In fact inflation is a major threat for the economy, while the Russia-Ukraine war only added more uncertainty to the global outlook. It is evident that the FED in the US doesn’t know anymore what to do to contain inflation and at this point if the American Central bank will proceed to hike rates by 250 basis points in 2022, that, wouldn’t surprise me at all. Inflation is a terrible thing when it gets going because this is the biggest nightmare for the economy and financial markets. If you observe the yield curve on the US treasuries 2 and 10 years, you will notice that the curve is inverted and the Fed is following the 2 years treasuries which it signals a crisis is on the way. Policymakers in all the world didn’t understand what it was going on, already since the end of 2020, and especially in Europe, the current scenario is pretty pretty sad. This continent which hosts, I do think, the worst politicians in the world, will definitely be in trouble for the next years. I’m an UE citizen and I’m pretty concerned for the future because the current situation is extremely shady and tricky, knowing that on  the other side of the ocean, there’s Joe Biden, who doesn’t seem so brilliant, diplomatic and ready to manage the global tensions. But let’s go to the point; Sure you are wondering why I’m so pessimist. To me, there are 2 worst case scenario; Military world war 3 or energy/food shortage crisis with energy prices mooning. Regarding world war 3; if this war is not going to end by the end of April/beginning of May, there are serious concerns that Putin might use chemical or biological or nuclear weapons. To me, such scenario will not go through, (although the risks are pretty likely) unless China will finally show its poker face and move to financiate the Russians in a global escalation. Tough to say and guess but everything is possible. On the other side instead, the energy and food shortage in Europe, unfortunately is quite likely and scary… Europe if you don’t know, is in terrible Diesel shortage. With the begin of the war, the energy scenario on the supply side is only getting worse and prices turned crazy higher. But the main issue in europe is DIESEL. There ’s a real Diesel shortage and this, raises risks of even greater oil price spike. I want to point out this detail, because in Europe there’s a systemic shortfall of Diesel; The thing that everybody’s concerned about will be diesel supplies. Do you know that Europe imports about half of its Diesel from Russia ? And Do you know that, actually, EU is probably going to ban the Oil and refined products from Russia by May 2022 ? And Diesel is not just a European issue, It is global. And the Diesel market is already quite tight and it gonna get tighter. So, without Diesel, all the traffic and transports will be halt, but not only in Europe, in the US too, because all the logistical supports and supply chains will soon be paralyzed. The consequences for the global economy , you know, would be catastrophic. Meanwhile major oil giants such as BP and Shell asked own refiners to halt gasoline and diesel exports in Europe, especially to Germany and Poland; China did precisely the same with the state-owned refiners. Actually this is to prevent a shortage as independent refiners are under big pressure to lower throughput in the face of soaring crude oil prices. So, to resume; demand is explosive, inventories at the lowest levels …. This is the perfect combo in order to turn on a potential huge spike in energy prices by June 2022. Important to remember that Russia exported 50% of all the energy requested to Europe and general consensus says that soon 3/4 milion barrels per day of Russian oil may not enter in the global market. USA imported oil and refined from Russia as well. That’s a terrific handicap which is going to generate more deficit in oil supply which was already extremely tight before the war. In the past 50 years, usualy, when we have got an hyper inflation ( in this case fast , 1.5 year), a recession it always followed. It is clear that at certain point we will peak, because  energy in eventual range $150/$200 would be unsustainable for many companies and individuals, provoking a brutal demand disruption. And that would mean the begin of a global economic downturn which will involve more or less all the most important institutions and corporations in all the world because less demand = less economic growth. It’s correct to remember  that Russia is a key supplier also for wheat, metals and fertilizers and the sanctions on Russia have led to sharp rises in various commodity prices. Disclosure: in the short term financial markets should have a temporary relief bounce (which has already begun 7 days ago) until at least Easter/end of April.. in always volatile market conditions. Well, personally I’m on the sidelines because I'm not confident on this market yet and geopolitic, economic and inflation scenario is pretty uncertain. Shortly, I don’t see any relief in supply chains shortage in 2022 (as predicted in previous articles) but instead even more issues going forward. I repeat that in the near future, Europe might likely face an energy and food crisis ( no food and energy ) or at least a rationing of them that could infect and spread in all the world. I sincerely hope to be wrong but be aware of your financial decisions and remember that we are on the edge of an unprecedented catastrophe, never seen in our generation. I officially cancel my previous calls for 2022 because Future is dark, especially for Europe,, and if the current scenario won’t change ….. unfortunately, the worst is yet to come ….